Startup company

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A startup company or startup is a company, a partnership or temporary organization designed to search for a repeatable and scalable business model.[1] These companies, generally newly created, are in a phase of development and research for markets. The term became popular internationally during the dot-com bubble when a great number of dot-com companies were founded.

Evolution of a startup company[edit]

Startup companies can come in all forms and sizes. A critical task in setting up a business is to conduct research in order to validate, assess and develop the ideas or business concepts in addition to opportunities to establish further and deeper understanding on the ideas or business concepts as well as their commercial potential. Business models for startups are generally found via a bottom-up or top-down approach. A company may cease to be a startup as it passes various milestones,[2] such as becoming publicly traded in an IPO, or ceasing to exist as an independent entity via a merger or acquisition. Companies may also fail and cease to operate altogether.

Investors are generally most attracted to those new companies distinguished by their risk/reward profile and scalability. That is, they have lower bootstrapping costs, higher risk, and higher potential return on investment. Successful startups are typically more scalable than an established business, in the sense that they can potentially grow rapidly with limited investment of capital, labor or land.

Startup Financing Cycle

Startups encounter several unique options for funding. Venture capital firms and angel investors may help startup companies begin operations, exchanging seed money for an equity stake. In practice though, many startups are initially funded by the founders themselves. Factoring is another option, though not unique to startups. Some new funding opportunities are also developing in crowd funding.[3]

Startup business partnering[edit]

Startups usually need to form partnerships with other firms to enable their business model.[4] To become attractive to other businesses startups need to align their internal features, such as management style and products with the market situation. In their 2013 study Kask and Linton develop two ideal profiles, or also known as configurations or archetypes, for startups commercializing inventions. The Inheritor profile calls for management style that is not too entrepreneurial (more conservative) and the startup should have an incremental invention (building on a previous standard). This profile is set out to be more successful (in finding a business partner) in a market that has a dominant design (a clear standard is applied in this market). In contrast to this profile is the Originator which has a management style that is highly entrepreneurial and have a radical invention (totally new standard). This profile is set out to be more successful (in finding a business partner) in a market that does not have an dominant design (established standard). New startups should align themselves to one of the profiles when commercializing an invention to be able to find and be attractive to a business partner. By finding a business partner a startup will have greater chances to become successful.[5]

Startup culture[edit]

Startups utilize a casual attitude in some respects to promote efficiency in the workplace, which is needed to get their business off of the ground. In a 1960 study, Douglas McGregor stressed that punishments and rewards for uniformity in the workplace is not necessary, as some people are born with the motivation to work without incentives.[6] This removal of stressors allows the workers and researchers to focus less on the work environment around them, and more at the task at hand, giving them the potential to achieve something great for their company.

This culture has evolved to include larger companies today aiming at acquiring the bright minds driving startups. Google, amongst other companies, has made strides to make purchased startups and their workers feel right at home in their offices, even letting them bring their dogs to work.[7] The main goal behind all changes to the culture of the startup workplace, or a company hiring workers from a startup to do similar work, is to make the people feel as comfortable as possible so they can have the best performance in the office.

Co-founders[edit]

Co-founders are people involved in the cultivation of startup companies. Anyone can be a co-founder, and an existing company can also be a co-founder, but frequently co-founders are entrepreneurs, engineers, hackers, venture capitalists, web developers, web designers and others involved in the ground level of a new, often high tech, venture.[citation needed]

There is no formal, legal definition of what makes somebody a co-founder.[citation needed] The right to call oneself a co-founder can be established through an agreement with one's fellow co-founders or with permission of the board of directors, investors or shareholders of a startup company. When there is no definitive agreement, disputes about who the co-founders were can arise. One example of such a dispute was a lawsuit against Elon Musk by a co-founder of Tesla Motors. Martin Eberhard alleged that Musk did not have the right to consider himself a co-founder merely because he provided a large amount of capital and was instrumental in saving the company from bankruptcy.[8]

Startup investing[edit]

Startup investing is the action of making an investment in an early stage company (the startup company). The solicitation of funds became easier for startups as result of the JOBS Act.[9][10][11][11]

Evolution of startup investing[edit]

Startup investing was a word of mouth activity since the implementation of the Securities Act from 1933. This rule introduced a ban on general solicitation and on startup companies to be able to advertise that they were raising funding. With the general solicitation ban lift introduced with the Title II of the JOBS Act, starting September 23, 2013, startups were finally allowed to generally solicit and use methods such as email newsletters, social media, blog posts, or other methods to announce a private offering.[12][13]

Startup investing rounds[edit]

When investing in a startup, there are different types of stages in which the investor can participate. The first round is called Seed round. This Seed round is generally when the startup is still at the very early days of execution when their product is still at a prototype phase. At this level angel investors will be the ones participating. The next round is called Series A. At this point the company already has traction and potentially making revenue. On Series A rounds Venture Capital firms will be participating alongside angels or super angel investors. The next rounds are Series B, C, and D. These three rounds are the ones leading to the IPO. Venture Capital firms and Private Equity firms will be participating.[14]

Startup investing online[edit]

With the passing of the JOBS Act and the donation crowdfunding model, startup investing platforms like Rock The Post or CircleUp started to emerge in 2011. The idea of these platforms is to streamline the process and resolve the two main points that were taking place in the market. The first problem was for startups to be able to access capital and to decrease the amount of time that it takes to close a round of financing. The second problem was intended to increase the amount of deal flow for the investor and to also centralize the process.[15][16][17]

Internal startups[edit]

Large or well-established companies often try to promote innovation by setting up "internal startups", new business divisions that operate at arm's length from the rest of the company. Examples include Target Corporation (which began as an internal startup of the Dayton's department store chain) and threedegrees, a product developed by an internal startup of Microsoft.[18]

Trends and obstacles[edit]

If a company's value is based on its technology, it is often equally important for the business owners to obtain intellectual property protection for their idea. The newsmagazine The Economist estimated that up to 75% of the value of US public companies is now based on their intellectual property (up from 40% in 1980).[19] Often, 100% of a small startup company's value is based on its intellectual property. As such, it is important for technology oriented startup companies to develop a sound strategy for protecting their intellectual capital as early as possible.[20]

Startup companies, particularly those associated with new technology, sometimes produce huge returns to their creators and investors – a recent example of such was Google, whose creators became billionaires through their stock ownership and options. However, the failure rate of startup companies is very high.[21]

While there are startup businesses created in all types of businesses, and all over the world, some locations and business sectors are particularly associated with startup companies. The internet bubble of the late 1990s was associated with huge numbers of internet startup companies, some selling the technology to provide internet access, others using the internet to provide services. Most of this startup activity was located in Silicon Valley, an area of northern California renowned for the high level of startup company activity:

The spark that set off the explosive boom of “Silicon startups” in Stanford Industrial Park was a personal dispute in 1957 between employees of Shockley Semiconductor and the company’s namesake and founder, Nobel laureate and co-inventor of the transistor William Shockley... (His employees) formed Fairchild Semiconductor immediately following their departure...

After several years, Fairchild gained its footing, becoming a formidable presence in this sector. Its founders began to leave to start companies based on their own, latest ideas and were followed on this path by their own former leading employees... The process gained momentum and what had once began in a Stanford’s research park became a veritable startup avalanche... Thus, over the course of just 20 years, a mere eight of Shockley’s former employees gave forth 65 new enterprises, which then went on to do the same...[22]

Recently the patent assets of failed startup companies are being purchased by what are derogatorily known as "Patent trolls" who then take the patents from the companies and assert those patents against companies that might be infringing the technology covered by the patent.[23]

See also[edit]

References[edit]

  1. ^ Blank, Steve (March 5, 2012). "Search versus Execute". Retrieved July 22, 2012. 
  2. ^ Rachleff, Andy. "To Get Big, You've Got to Start Small". TechCrunch. Retrieved 2013-01-28. 
  3. ^ "Cash-strapped entrepreneurs get creative", BBC News
  4. ^ [1] "Business Models, Business Strategy and Innovation"
  5. ^ [2]"Business mating: when start-ups get it right, Kask Linton 2013"
  6. ^ Douglas McGregor. Theory X Theory Y employee motivation theory. Accel-team.com. Retrieved on 2013-07-21.
  7. ^ Barking mad: Can office dogs reduce stress? - CNN.com. Edition.cnn.com. Retrieved on 2013-07-21.
  8. ^ Ken Bensinger (September 22, 2009). "Tesla founders end bitter legal fight". Los Angeles Times. Retrieved August 25, 2013. 
  9. ^ "Startups, VCs Now Free To Advertise Their Fundraising Status". The Wall Street Journal. Retrieved September 23, 2013. 
  10. ^ "All-comers join web party for a punt on best start-ups". Financial Times. Retrieved September 26, 2013. 
  11. ^ a b "Startups Remain Cloudy on the New General Solicitation Rule". Bloomberg Businessweek. Retrieved September 20, 2013. 
  12. ^ "Newly Legal: Buying Stock in Start-Ups Via Crowdsourcing". ABC News. Retrieved September 24, 2013. 
  13. ^ "Levine on Wall Street: Chrysler's Unwanted IPO". Bloomberg. Retrieved September 24, 2013. 
  14. ^ "With the new JOBS Act a new era of investment banking?". Nasdaq. Retrieved September 24, 2013. 
  15. ^ "Shout it out: New rules allow startups to advertise fundraising". UpStart Business Journal. Retrieved September 23, 2013. 
  16. ^ "General Solicitation Ban Lifted Today - Three Things You Must Know About It". Forbes. Retrieved September 23, 2013. 
  17. ^ "For broker/dealers, crowdfunding presents new opportunity". Washington Post. Retrieved March 28, 2013. 
  18. ^ "Hong Kong in Honduras", The Economist, December 10th 2011.
  19. ^ See generally A Market for Ideas, ECONOMIST, Oct. 22, 2005, at 3, 3 (special insert)
  20. ^ For a discussion of such issues, see, e.g., Strategic management issues for starting an IP company, Szirom, S.Z., RAPID, HTF Res. Inc., USA (ISBN 0-7695-0465-5); What Business Owners Should Know About Patenting, Wall Street Journal, available at http://www.wsj.com/article/SB121820956214224545.html (Interview with James McDonough, Intellectual property attorney),
  21. ^ "High Tech Start Up, Revised and Updated: The Complete Handbook For Creating Successful New High Tech Companies", John L. Nesheim
  22. ^ A Legal Bridge Spanning 100 Years: From the Gold Mines of El Dorado to the 'Golden' Startups of Silicon Valley by Gregory Gromov 2010.
  23. ^ JAMES F. MCDONOUGH III (2007). "The Myth of the Patent Troll: An Alternative View of the Function of Patent Dealers in an Idea Economy". Emory Law Journal. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=959945. Retrieved 2007-07-27.

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